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Ferrell Inc. recently reported net income of $7 million. It has 600,000 shares of common stock,...

Ferrell Inc. recently reported net income of $7 million. It has 600,000 shares of common stock, which currently trades at $27 a share. Ferrell continues to expand and anticipates that 1 year from now, its net income will be $10.85 million. Over the next year, it also anticipates issuing an additional 120,000 shares of stock so that 1 year from now it will have 720,000 shares of common stock. Assuming Ferrell's price/earnings ratio remains at its current level, what will be its stock price 1 year from now?

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Answer #1

Net income = $7 million Number of shares of common stock = 600,000 Current Market Price = $27

Earning Per Share = Net income / Number of shares of common stock = $7,000,000 / 600,000 = $11.67

Ferrell's price/earnings ratio at its current level = Current Market Price / Earning Per Share

= $7,000,000 / 600,000 = 2.314

Expected EPS of year 1 = Net Income next year / Number of shares of common stock next year

= $10,850,000 / 720,000 = $15.069

Assuming Ferrell's price/earnings ratio remains at its current level, which means Ferrell's price/earnings ratio will remain at 2.314 times.

2.314 = stock price 1 year from now / Expected EPS of year 1

stock price 1 year from now = 2.314 * $15.069 = $34.87

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